'Unilever: biggest opportunity in the world'

Conglomerates from Unilever to Pearson and even GE are potentially juicy targets for corporate activists looking to maximise value by splitting them into separate parts, says Sylvia Pfeifer

If Nelson Peltz is looking for another corporate scalp after his success at Cadbury, he need look no further than Unilever. The Anglo-Dutch consumer goods conglomerate heads the list of companies tipped to become the next target of corporate activists.

"Unilever is the biggest opportunity in the world for a shake-up," says one corporate adviser in the City. "It is difficult to find a more attractive target. I don't think any of this is lost on the management."

Home to some of the world's best-known brands from Hellman's mayonnaise to Signal toothpaste, Unilever has for years been seen as a safe but dull investment. Weak growth, a highly bureaucratic culture and a lumbering management structure that until recently featured two boards, have hampered its performance. Although it abolished its dual structure last year and has since embarked on a transformation under new chief executive Patrick Cescau, some investors are still keen for more radical action.

Until earlier this month, shares in Unilever had underperformed the FTSE All-Share index by more than 20 per cent over the previous three years. Some of that discount has since disappeared as investors have speculated that the company might become the next break-up target. One option would be to split the company into its three principal businesses: household, food and personal care.

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Andrew Wood, an analyst at Sanford Bernstein in New York, estimates that if each business is valued individually, Unilever looks undervalued by between 5 and 44 per cent, depending on certain assumptions.

Sceptics, however, caution that - unlike Cadbury - any split would be much more complicated as the individual units are not as distinct. Wood also points out that given Unilever's size - with a market value of more than £38bn, almost three times that of Cadbury's £13.7bn - any activist investor would also have to take a much bigger stake than Peltz's 3 per cent in Cadbury to achieve the clout to effect change.

Despite such potential hurdles, what the speculation surrounding Unilever and the recent events at Cadbury make clear, is that corporate activism is no longer a phenomenon restricted to the smaller and medium-sized companies.

These days, chief executives at some of Britain's biggest companies have to contend with pressure from shareholders versus pressure from private equity: every-one is vulnerable.

It is a message that will not be lost on Mark Tucker, the chief executive of Prudential. Hedge funds, said to include the activist Toscafund, are believed to have taken stakes in the insurer in recent weeks in order to force a break-up.

Earlier this month Tucker shied away from announcing the sale of the UK business following a detailed strategic review. Instead, the company will concentrate mainly on its annuities business. It is also exploring the possibility of realising the £9bn surplus on its life funds which cannot be attributed to existing policies. While the announcement was broadly welcomed - analysts have since upped their forecasts - some investors question whether Tucker has gone far enough.

Other chief executives that are also under attack include Tim Clarke of Mitchells & Butlers. The pubs operator is under pressure from Robert Tchenguiz to generate more value from its extensive property portfolio. The property entrepreneur, who has built up a reported 20 per cent-plus holding in the group, has threatened to make a hostile bid if the group does not spin off its property into a Real Estate Investment Trust.

Industry pundits speculated last week that if Tchenguiz fails with his onslaught at M&B, he could turn his sights back to Marston's, formerly Wolverhampton & Dudley. That board is understood to be weighing up the pros and cons of spinning off its property portfolio into a Reit to increase shareholder value.

Whitbread, the pubs and budget hotel group, is another company whose extensive property portfolio has already attracted attention. Starwood Capital, the US private equity group, recently emerged as a shareholder, fuelling speculation it may launch a bid for the UK company. Analysts at Citigroup recently suggested that its property alone is worth £4.1bn - or £20.70 per share.

Despite the speculation, supporters of the group say that its management has so far always managed to stay one step ahead of potential break-up bidders. Chief executive Alan Parker has won plaudits for streamlining the business and selling assets. In June, he is expected to reveal plans to restructure the group's balance sheet which most analysts agree is undergeared.

Low gearing is among a number of factors cited by corporate advisers as a factor guaranteed to attract the attentions of corporate raiders - or private equity. "There is no reason why public companies cannot be run closer to private equity models," says one financier. "Many of them are far too under-leveraged."

Other potential break-up candidates regularly cited include Pennon Group, the utility which owns South West Water and Viridor, the waste management business, and Pearson, the publisher of the Financial Times. Analysts say Pennon's share price fails to reflect the true value of Viridor and that a spin-off would make sense given the huge interest among investors in waste management businesses.

At Pearson, management has so far resisted calls to break up the group. Last month chief executive Dame Marjorie Scardino silenced some of her critics after unveiling a 15 per cent rise in full-year underlying operating profits to a record £592m.

Eric Daniels, the chief executive at Lloyds TSB, has no doubt been on the receiving end of similar arguments. Scottish Widows, the bank's life assurance arm, has long been seen as a potential bid target; Axa and Swiss Re made a joint bid for the business late last year but were rebuffed. Critics say the management has been too focused on simply maintaining a high dividend yield - it has a historic dividend yield of almost 5.8 per cent - while not investing any capital.

Supporters, meanwhile, point out that the group is considering some disposals; Lloyds Registrars, its lucrative shareregistration and stock-management business, is on the market, as is Abbey Life, its closed-life insurance operation.

Long-term company watchers also argue that a full-scale takeover would make more sense than a break-up bid. Wells Fargo and Bank of America are often cited as potential suitors. But if the likes of Peltz really want to shake things up, they could aim their sights at some of the world's old-style industrial conglomerates. Saint-Gobain, the French industrials group which acquired BPB, the British plasterboard company about 18 months ago, is mentioned by one financier as an obvious break-up candidate. There are no obvious synergies between some of its activities but it is either number one or number two in most of its markets.

One rumour has focused on the role Albert Frère, the Belgian investor, could play in a potential break-up. Frère took a stake in Lafarge, the French building materials group, last year, increasing pressure on its management. One industry pundit suggests that Frère could ultimately try and merge Lafarge's gypsum operations with those of Saint-Gobain.

Even General Electric, the 128-year-old conglomerate and one of the world's largest companies, is no longer immune to break-up speculation. Despite having met demanding financial targets, the group's shares have underperformed the S&P 500 index by more than 20 per cent in the past six years and investors are growing restless. While no one is suggesting a private equity group would be able to launch a bid for GE, chief executive Jeffrey Immelt may have to consider the unthinkable: that the conglomerate should shed one of its major divisions such as its NBC entertainment business.

Perhaps the appearance of someone like Peltz on the shareholder register would at least kickstart the share price.